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Melqart Asset Management (UK) Limited Pillar 3 Risk Disclosure

Melqart Asset Management (UK) Limited (“Melqart” or the Firm) is required by the FCA to disclose information relating to the capital it holds and each material category of risk it faces in order to assist users of its accounts and to encourage market discipline.

The Capital Requirements Directive (CRD) created a revised regulatory capital framework across Europe covering how much capital financial services firms must retain. In the United Kingdom, rules and guidance are provided in the General Prudential Sourcebook (GENPRU) for Banks, Building Societies and Investments Firms (BIPRU).

The FCA framework consists of three "Pillars":

  • Pillar 1 sets out the minimum capital requirements that companies need to retain to meet their credit, market and operational risk;
  • Pillar 2 requires companies to assess whether their Pillar 1 capital is adequate to meet their risks and is subject to annual review by the FCA;
  • Pillar 3 requires companies to develop a set of disclosures which will allow market participants to assess key information about its underlying risks, risk management controls and capital position. These disclosures are seen as complimentary to Pillar 1 and Pillar 2.

Rule 11 of BIPRU sets out the provisions for Pillar 3 disclosure. The rules provide that companies may omit one or more of the required disclosures if such omission is regarded as immaterial. Information is considered material if its omission or misstatement could change or influence the decision of a user relying on the information. In addition, companies may also omit one or more of the required disclosures where such information is regarded as proprietary or confidential. The Firm believes that the disclosure of this document meets its obligation with respect to Pillar 3.

Firm Overview
Melqart is incorporated in the UK and is authorised and regulated by the FCA as a Full Scope Alternative Investment Fund Manager and is categorised by the FCA for prudential regulatory purposes both as a Collective Portfolio Management Firm (“CPMI”) and a BIPRU firm.

The Board of Melqart has the daily management and oversight responsibility. It generally meets quarterly and is composed of:

  • Michel Massoud - Chief Executive
  • Stephen Platts - Director

The Board is responsible for the entire process of risk management, as well as forming its own opinion on the effectiveness of the process. In addition, the Board decides Melqart’s risk appetite or tolerance for risk and ensures that Melqart has implemented an effective, ongoing process to identify risks, to measure its potential impact and then to ensure that such risks are actively managed. Senior Management is accountable to the Board for designing, implementing and monitoring the process of risk management and implementing it into the day-to-day business activities of Melqart.

Capital Resources and Requirements

Pillar 1
Melqart was authorised by the FCA on 22 September 2015 and holds regulatory capital resources of £500,000, comprised solely of core Tier 1 capital of share capital contributions.
The Firm has calculated its BIPRU capital resources in accordance with GENPRU 2.2:

As a limited company its capital arrangements are as follows:

 

£000

Share Capital

£500

Audited reserves

£0

Hybrid Capital

£0

Tier 2 Capital

£0

Total

£500

The firm is required to as a CPMI firm to maintain at all times ‘own funds’ which equal or exceed the higher of:

  • Funds under management requirement of €125,000 plus 0.02% of the AIF AUM exceeding €250,000,000 and
  • The sum of its market and credit risk requirements; or
  • Own funds based on FOR (which is essentially 25% of the firm’s operating expenses less certain variable costs)
  • PLUS: PII Capital requirement based on the excess for professional liability risk;

As at 31 December 2016, the Firm's Pillar 1 capital requirement was £306,630.

Satisfaction of Capital Requirements

Pillar 2
The Firm has adopted the “Structured” approach to the calculation of its Pillar 2 Minimum Capital Requirement as outlined in the Committee of European Banking Supervisors Paper, 27 March 2006 which takes the higher of Pillar 1 and 2 as the ICAAP capital requirement.  It has assessed Business Risks by modelling the effect on its capital planning forecasts and assessed Operational Risk by considering if Pillar 2 capital is required taking into account the adequacy of its mitigation.

Since the Firm's Internal Capital Adequacy Assessment Process (ICAAP or Pillar 2) has not identified capital to be held over and above the Pillar 1 requirement, the capital resources detailed above are considered adequate to continue to finance the Firm over the next year. No additional capital injections are considered necessary and the Firm expects to continue to be profitable.

Risk Management
The Firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. The risk management process is overseen by the Firm's senior management.

As risks are identified within the business, appropriate controls are put in place to mitigate these and compliance with them is monitored on a regular basis. The frequency of monitoring in respect of each risk area is determined by the significance of the risk. The Firm does not intend to take any risks with its own capital and ensures that risk taken within the portfolios that it provides advice to is closely monitored. The results of the compliance monitoring performed is reported to the partners by the Compliance Officer.

Operational Risk
The Firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.
The Firm has identified a number of key operational risks. These relate to disruption of the office facilities, system failures, trade failures and failure of third party service providers. Appropriate policies are in place to mitigate against risks, including appropriate insurance policies and business continuity plans.

Credit Risk
The main credit risk to which the Firm is exposed is in respect of the failure of its debtors to meet their contractual obligations. The majority of the Firm's receivable is related to investment management activities. The Firm believes its credit risk exposure is limited since the Firm’s revenue is ultimately related to management fees received from funds. These management fees are drawn throughout the year from the funds managed. Other credit exposures include bank deposits and office rental deposits.

The Firm undertakes periodic impairment reviews of its receivables. All amounts due to the Firm are current and none have been overdue during the year. As such, due to the low risk of non-payment from its counterparties, management is of the opinion that no provision is necessary. A financial asset is overdue when the counterparty has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.

The Firm has adopted the standardised approach to credit risk, and therefore follows the provision within BIPRU 3 standardised credit risk of the FCA handbook. The Firm applies a credit risk capital component of 8% to its non-trading book risk weighted exposure. As the Firm does not make use of an external credit rating agency, it is obligated to use a risk weight of 100% to all non-trading book credit exposures, except cash and cash equivalents which are held by investment grade firms and currently attract a risk weighting of 20%.

The table below sets forth the Firm's credit exposures and corresponding capital resource requirements as at the date of its ICAAP assessment:

Capital

£

Funds under management requirement (a)

£203,087

Fixed overheads requirement(b)

£285,969

Credit risk + Market Risk (c)

£72,788

PII defined excess (d)

£20,661

Total Capital requirements (a) or (b) or (c) PLUS (d)

£306,630

Surplus

£193,470

 

Solo Basis

Credit Exposure

Risk weighted Exposure

National Governments

£0

£0

Tangible fixed assets

£22,952

£22,952

Due from affiliates – within 3 months

£0

£0

Due from affiliates – after 3 months

£0

£0

Cash at bank

£250,761

£50,152

Prepayments

£627,862

£627,862

Other

£208,881

£208,881

 

----

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Total

£1,110,456

£909,847

 

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Credit Risk Capital Component (8% of risk weighted exposure)

 

£72,788

Market Risk
Since the Firm holds no trading book positions on its own account, and all fee income is converted to GBP, the Firm’s exposure to foreign currency risk is not significant. Since the settlement of debtor balances take place without undue delay, the timing of the amount becoming payable and subsequently being paid is such that it is not considered to present a material risk to the Firm. The Firm has excluded Market risk on the basis that it is not a material risk to the Firm.

Remuneration Code
The Firm has adopted a remuneration policy and procedures that comply with the requirements of chapter 19B of the FCA's Senior Management Arrangements, Systems and Controls Sourcebook (SYSC), and in accordance with ESMA’s Guidelines on sound remuneration policies. The Firm have considered all the proportionality elements in line with the FCA Guidance.  
As a UK AIFM the Firm has assessed the proportionality elements and disapplies the Pay Out Rules.  Furthermore, the Firm has concluded, on the basis of its size and the nature, scale and complexity of its legal structure and business that it does not need to appoint a remuneration committee. Instead, the Board sets, and oversees compliance with, the Firm's remuneration policy including reviewing the terms of the policy at least annually.

Remuneration disclosure

The Firm is a Remuneration Code Proportionality Level 3 Firm and applied the rules appropriate to its Proportionality Level. The Board is responsible for the Firm’s remuneration policy. All variable remuneration is adjusted in line with capital and liquidity requirements.

Remuneration Code Staff Remuneration by Business Area

Business Area

Total Remuneration

Investment Management

£913,364

Aggregate Quantitative Remuneration by Senior Management and other Remuneration Code Staff

Type of Remuneration Code Staff

Total Remuneration

Senior Management (SIF)

£123,911

Other Remuneration Code Staff

£789,543

Total

£913,364

Melqart Asset Management (UK) Limited's Commitment to the UK Stewardship Code

Under Rule 2.2.3R of the FCA's Conduct of Business Sourcebook, Melqart Asset Management (UK) Limited (the "Firm") is required to include on this website a disclosure about the nature of its commitment to the UK Financial Reporting Council's Stewardship Code (the "Code") or, where it does not commit to the Code, its alternative investment strategy. The Code is a voluntary code and sets out a number of principles relating to engagement by investors with UK equity issuers. Investors that commit to the Code can either comply with it in full or choose not to comply with aspects of the Code, in which case they are required to explain their non compliance and state in general terms its alternative investment strategy.

The seven principles of the Code are that institutional investors should:

  • Publicly disclose their policy on how they will discharge their stewardship responsibilities
  • Have and publicly disclose a robust policy on managing conflicts of interest in relation to stewardship
  • Monitor their investee companies
  • Establish clear guidelines on when and how they will escalate their activities
  • Be willing to act collectively with other investors where appropriate
  • Have a clear policy on voting and disclosure of voting activity
  • Report periodically on their stewardship and voting activities

The Firm provides investment management services to various funds (“the Funds”) that pursue investment strategies that involve investing in a wide range of securities and instruments without limitation in various jurisdictions. If the Firm were to invest directly in UK single equities these would represent only a small part of the firm’s business. Hence, while the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The approach of the Firm in relation to engagement with issuers and their management is determined globally. The Firm takes a consistent approach to engagement with issuers and their management in all of the jurisdictions in which it invests and, consequently, does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction.

For further information on the Firm’s approach contact: compliance@melqart.com

More information is available to existing investors through the State Street Global Services Investor Portal.